Friday, October 15, 2010

More on "Nikkei 63,000,000"

The MarketWatch piece we linked to this morning, "No typo: Analyst sets Nikkei 63 million target" (it's Société Générale's Dylan Grice)" wasn't as detailed as SocGen aficionados might demand.
No problem, FT Alphaville rises to the occasion:

And to think the market shorthand has always been Japan = deflation.
Trust Société Générale strategist Dylan Grice to think of the Japanese future a little, um, differently. From Friday’s Popular Delusions note:
Japan is no Zimbabwe. Neither was Israel, yet from 1972 to 1987 its inflation averaged nearly 85%. As its CPI rose nearly 10,000 times, its stock market rose by a factor of 6,500 … Regular readers know that I don’t generally make forecasts, but that every now and then I do go out on a limb. This is one of those occasions. Mapping Israel’s experience onto Japan would take the Nikkei from its current 9,600 to 63,000,000. This is our 15-year price target…
And in which case, there’s no resort but to queue up those 15-year 40,000 strike call options.
Or … maybe not. There’s something not right with this comparison to Israeli hyperinflation, even if Japan has plenty of other problems.
But first, here’s Grice’s argument:
Any meaningful repricing of Japanese sovereign risk would push yields to a level the government would be unable to pay…
And put a question-mark over Japanese banks’ holdings of government bonds, which no less an organisation than the IMF has worried about in recent weeks, at the same time as recalling a 2003 spike in JGB yields.
Back to Grice for more:
…the path of least political resistance will presumably be to keep yields at levels which the Japanese government can afford to pay, and to stabilise JGBs at levels which won’t blow up the financial system. This will involve the BoJ buying any/all bonds the market can no longer absorb, probably under the intellectual camouflage of “a quantitative easing program” aimed at breaking Japan’s deflationary psychology. Economists might applaud such a step as finally showing the BoJ was “getting serious about Japan’s problems”. In fact, it will be the opening chapter of a long period of inflation instability.
But hang on just a second — others argue, pretty persuasively, that the curious demographics of Japan have already entrenched deflation: it fits with Japanese pensioners’ bias towards fixed-income holdings....MORE